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Setting Price in the New Economic Climate: Considerations beyond the institution’s competitive market position

In this January 2011 University Business article, Kathy Kurz discusses the importance of understanding net price position, as well as paying attention to competitors' increases, students' price sensitivity, and affordability messaging.


 

We have written before about the importance of considering your institution’s market position relative to competitors when planning future price increases. When sticker price position is higher than “prestige” position (based on publicly available measures like test scores, U.S. News rank, and selectivity) institutions often see declining demand. While these benchmarking comparisons are still important, the new economic climate, along with the new requirement that all institutions have a net price calculator on their website by next fall, make it increasingly important to consider other factors, as well.


Recent pricing trends of competitors may help in projecting their likely increases for the coming year.



NET PRICE POSITION

First, it is no longer enough to know your sticker price position. You also need to understand your net price position. Using IPEDS data, you can enter the name of any institution and view their tuition and fee history (2006-07 though 2009-10) as well as 2008-09 data on the number of freshmen receiving institutional grants or scholarships and the average amount received. Using IPEDS data, you can enter the name of any institution and view their tuition and fee history (2006-07 though 2009-10) as well as 2008-09 data on the number of freshmen receiving institutional grants or scholarships and the average amount received. From  this information, it is possible to calculate a freshman discount rate for the institution, albeit the rate will be a couple of years old.


For example: 2008-09 tuition and fees = $25,596.

  • % of first time students receiving institutional grants = 87%
  • Average institutional grant received = $10,376
  • Discount rate = (0.87 * $10,376)/ $25,596 = 35.3%


Applying this discount rate to the current tuition and fee charges of the institution (usually available via their web sites) will give you an estimate of their average discount and therefore net tuition and fee price for freshmen.


For example: 2010-11 tuition and fees = $27,740

  • Average discount = $27,740 * 35.3% = $9,792
  • Average net tuition and fees = $27,740 - $9,792 = $17,948


Note: the IPEDS site also provides “net price” information, but this is based on just students receiving government aid and is using total expenses, rather than just tuition and fee charges. Therefore, it is not as helpful as the approach described above.


Of course this “average” figure will likely be very different for different subpopulations—academically strong students versus marginal admits; high-need versus low-need students; etc. However, it does provide some general information to understand how both your sticker price and your net price compare to that of your competitors. To learn more about how your net price might differ from that of your competitors for different subpopulations, you can also check institutional websites to see if they have posted information about merit eligibility criteria or have already implemented a net price calculator. As noted above, all institutions will have to post such calculators by fall.


Competitors’ Increases

Pay attention, also, to how the annual increases of your competitors may be changing. Scannell & Kurz has seen smaller tuition increases among private institutions and higher tuition increases among public institutions in the last two years. Looking at recent trends of competitors may help in projecting their likely increases for the coming year.


All of this information will help the institution understand if the tuition increases needed from a budget perspective are likely to have a negative impact on recruitment results. For example, if your sticker and net price position are already high relative to primary competitors with similar “prestige” profiles, increasing tuition more aggressively than they are likely to (based on their recent increase trends) could result in a drop-off in demand for your institution. At a minimum, an institution in this position should expect that an increase in the discount rate may be necessary to compensate for the increase in tuition charges.


Students’ Price Sensitivity

Some institutions are trying to get more detailed estimates of price sensitivity by conducting tuition pricing elasticity studies in which prospective students and parents are asked to make choices between a set of institutions and price levels. More information about such surveys can be found on the Stamats website.


Alternatively, institutions can use data on how students have responded to discounts in the past as a proxy for understanding which subpopulations are likely to be most sensitive to increases in price, and which will continue to enroll despite those increases. This is typically the approach we take with our clients who have questions about pricing and discounting strategies. Both approaches have merit and typically lead to similar conclusions.


It is also important to look at changes in your institution’s admit pool and yield behavior over the last two years to know if there are any “red flags” that suggest increased price sensitivity. For example, are you seeing yield rates decline among aid filers demonstrating no need? If so, the trend is likely to increase if you implement above average increases in price.


Data from the National Student Clearinghouse can also help officials understand if the institution is losing an increasing number of students to lower-cost options—either prior to enrollment or through attrition. (Note: When using the Clearinghouse’s Student Tracker service, institutions submit the ID numbers of admitted students who did not enroll, or ID numbers of students who have withdrawn from the institution and receive back data on where those students are now enrolled.)


Data from the Clearinghouse can also be merged with data from an institution’s student system to understand if there are different competitor sets for different types of students (high quality versus low quality; high need versus low need; etc.).


Usually, returning students are less price sensitive than incoming students, but it is important to monitor retention trends, as well. Have retention rates declined in the last two years among students with high levels of unmet need (after grant)? If so, it may be necessary to buffer your next tuition increase by increasing grant levels for that population.


For schools with a fairly small recruitment “footprint,” local economic data (such as unemployment rates) can also shed some light on how families might respond to an aggressive tuition increase. In the predictive models S&K are developing for clients to understand price sensitivity, county unemployment rates are consistently emerging as statistically significant drivers of enrollment behavior.


Price Cut Cautions

Given the economic climate, some private institutions are wondering if they should actually cut their price. This high-risk strategy needs to be approached with great caution. Typically, three factors need to be in place before institutions should even begin to think about this approach.

  1. The institution needs to be significantly under capacity so that reductions in the average net tuition revenue generated by enrolling students due to decreases in price can be made up through increases in quantity without having to add significant fixed costs.
     
  2. Almost all students should be receiving institutional scholarships or grants in excess of the amount of the proposed tuition reduction. That way, when prices are reduced, the financial aid program can be adjusted as well, so that the vast majority of current students would be paying the same net price as they were before the cut. This makes a price cut much less risky, as net revenues will be minimally impacted, even if enrollments do not grow as much as expected.
     
  3. The institution needs to be prepared to invest some money in marketing the new price in a manner that will reinforce the quality and benefits of the educational experience to ensure the change is not seen as a “fire sale.”


Affordability Messaging

Whatever the institution’s sticker price, messages about affordability need to be sent early and often to prospective students and their parents. Even at low-cost institutions, some portion of the prospect pool will find the charge above their means, so this advice applies to both public and private institutions. And although every institution will soon offer a net price calculator, most calculators will require families to provide an extensive amount of information to get the estimate.


Consequently, it is not clear how many families will actually be willing to go through the process for every institution they are considering. Offering simple messages (e.g., an income profile of the class showing that students from all backgrounds attend or scholarship programs with clear eligibility criteria and award amounts) to encourage families to complete the aid application process will still be important.


In summary, the economic volatility of the last few years has presented families and institutions alike with new challenges. Colleges and universities need to meet this new world order with sound empirical analysis and strategic action. 

 


This article originally appeared in the January 2011 issue of University Business.